Genzyme and Relational Investors: Science and Business

Collide?

Financial Management Case Study

Lecturer: Prof. Dr. Eduardus Tandelilin, M.B.A.

Submitted by:

Andry

23/526965/PEK/29821

Asyifa Rahmadanti

23/526471/PEK/29746

Clarissa Tania

23/527500/PEK/29879

MAGISTER MANAGEMENT FACULTY OF ECONOMICS AND BUSINESS

UNIVERSITAS GADJAH MADA

JAKARTA

2023
Case Background
Termeer had been the chairman and CEO of Genzyme Corporation which grown from
entrepreneurial ventures to be one the United States's top-five biotechnology company. After
Termeer became CEO, Genzyme raised $28.5 million in its 1986 IPO and began trading on the
NASDAQ. Genzyme's expertise received a considerable boost in several areas of biotechnology:
molecular biology, protein and nuclear acid chemistry, and enzymology. Genzyme's most
rewarding product was the first effective long-term enzyme replacement therapy for patients with
a confrrmed diagnosis of Type I Gaucher's disease which received FDA approval in 1991,
known as Ceredase. The price for 'Ceredase was $150,000 per patient, per year, making it one of
the most expensive drugs sold at the time.

Introducing the initial announcement of investor, Relational Investors (RI) which now had a
2.6% stake in Genzyme; made it as one of top 10 stakeholders in Genzyme. Under Whitworth,
cofounder of Relational Investors, RI was commonly classified by observers as an "activist"
investment fund. The largest initial investment was the $200 million that came from the
California Public Employees' Retirement System (CalPERS). In recognition of RI' s
performance, CalPERS had invested a total of $1.3 billion in RI by 2008.

When RI announce its 1% investment in Genzyme, both were gaining great accomplishment by
record revenues of $4.6 billion for 2008 during the financial crisis 2007-08. Several months
after, over five trading days, Genzyme’s stock price drop by 21% after operational problem and
received official warning letter from the U.S. Food and Drug Administration (FDA) on February
27, 2009. The company responded to the FDA by publicly disclosing its manufacturing issues.

Up to this time, Termeer had not considered RI to be a threat, but what if there were other
corporate activists or hedge funds monitoring Genzyme and looking to set its corporate policy,
then maybe he should take note that Genzyme now had an "activist" investor. What should
Termeer do?

During the process of RI and Genzyme relationship, RI challenge Genzyme on issues such as:
a) improve capital allocation decision making to ensure that spending would be focused on the
investment with the highest expected return;
b) implement a share-buyback or dividend program;
c) improve board composition by adding more members with financial expertise; and
d) focus executive compensation on the achievement of performance metrics.

This brought to mind the earlier demands by another activist investor, Carl Icahn, who had
purchased 1.5 million shares of Genzyme during third quarter 2007. Termeer who develop
Genzyme for more than two decades then identified decision on:
a) Fight Whitworth as he had fought Icahn. To do this, he would need to enlist the board to join
him in what would be a public relations battle for shareholder support.
b) Welcome Whitworth onto the board to reap the benefits of his experience in how to create
shareholder value. In this regard, he could think of Whitworth as a free consultant.
c) Manage Whitworth by giving him some items on his list of demands but nothing that would
compromise the core mission of Genzyme.
Problem Statement
Genzyme has acquired many accomplishments throughout the year, including the long-term
growth of the price of the stock, the successful treatment of people with rare diseases using
Genzyme’s product and surviving the financial crisis by generating $4.6 billion revenues in
2008.

Upon the first month of introduction between Termeer and Whitworth, Genzyme encounter an
operational problem on one of the company’s manufacturing plant in Allston, Massachusetts,
which lead to the issuance of official warning letter from the U.S. Food and Drug Administration
(FDA) in which the company responded by conducting quality assessment regarding the system.
Additionally, the fall of Genzyme’s stock price had yet to recover over five trading days.

In regards to responding to Whitworth's demands, Genzyme’s shareholders’ annual meeting has

been scheduled for May 21 and the result of the meeting may have an impact on Genzyme’s
company strategy.

Problem Analysis and Solutions

According to the calculation performed by Relational Investors (RI), Genzyme’s share price was
trading at $34 below its fundamental value. Whitworth believe the gap originated based on the
two main sources:
1. Money not being spent efficiently enough to earn adequate returns
2. Genzyme had experienced major issue in conducting corporate governance
Major causes of aforementioned gaps include inadequate implementation of Genzyme’s
diversification strategies resulting in failures on providing adequate return to the stakeholders,
poor integration results with a merger partner or acquisition and lack of alignment in managing
management incentives.
In regards of eliminating the gaps, RI then offered several recommendation to address this
matters:
1. Improve capital allocation decision making to ensure that spending would be focused on
the investment with the highest expected return.
 2. Implement a share-buyback or dividend program.
3. Improve board composition by adding more members with financial expertise.
4. Focus executive compensation on the achievement of performance metrics.

According to the recommendation, Termeer identified three different approaches he could use:
1. Fight Whitworth in a manner reminiscent of his battle against Icahn. To achieve this,
he would have to rally the board to stand with him in what could evolve into a public
relations struggle to secure shareholder backing.
2. Welcome Whitworth to the board and harness his experience in generating
shareholder value. In this context, Whitworth could be regarded as a valuable unpaid
consultant.
3. Handle Whitworth's requests by granting certain items from his list of demands,
ensuring that none of these concessions jeopardize the fundamental mission of
Genzyme.

It has been concluded that both Treemer and Withworth have a different view related to
Genzyme, where Treemer choose to maintain their core mission to deliver the best service
possible to the customer and Withworth’s sees Genzyme at it best potential as a company
especially from financial aspect. The best possible option to choose amongst Termeer’s
approaches would be granting several of Whitworth’s appeals without letting him jeopardize the
company’s fundamental mission.

In regards of eliminating the differences, Treemer should consider choosing below

recommendation:
1. Improve capital allocation decision making to ensure that spending would be focused on
the investment with the highest expected return.
2. Improve board composition by adding more members with financial expertise.

By focusing on the highest earning segment would potentially lead to increasing Genzyme’s
sales thus leading to the increase of net income earning more income thus generating more EPS